Interest rates to rise to 6%

New Chancellor Alistair Darling faces his first big test this week with the Bank of England almost certain to raise interest rates by another quarter point to the highest in more than six years.

As the Bank piles on the agony for millions of homeowners and borrowers, Darling's reaction will be scrutinised by the City and overseas financial markets for any sign of weakening of the iron-hard anti-inflationary credentials of predecessor, Gordon Brown.

With house prices continuing to roar ahead despite three rises to 5.5% in the benchmark rate since last August, the betting is on another rise at the Monetary Policy Committee meeting on Thursday.

Worse still for the heavily indebted millions whose borrowing helped fuel the economy during Brown's ten-year stint at the Treasury, the financial community now believes 5.75% may not mark the peak. Last week, the money market was signalling 6% by the end of the year, the highest since 2001.

The June house-price index from Nationwide showed property price inflation rising to 11.1% a year from 10.3% in the year to May. The M4 measure of money supply, growing at more than 13% a year, is another cause for concern.

Professor Peter Spencer of York University, economist to the independent Item Club, said: 'I think rates have to go up until M4 growth is reined back to single figures. It is very hard to be confident that six% is the highest that rates will go.'

Underlining the economic buoyancy are two surveys due this week from purchasing managers in manufacturing and service industries.

Ross Walker, economist at Royal Bank of Scotland, said: 'Both are at such levels that even a small decline would not be significant. Manufacturing is doing surprisingly well.'

On Wednesday, the Bank will unveil figures for mortgage equity withdrawal in the first quarter. Walker said: 'People are using equity withdrawal to cushion themselves from the effect of the slowdown and to allow them to keep on spending.'